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Money and Information

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  • Aleksander Berentsen
  • Guillaume Rocheteau

Abstract

This paper investigates the role of fiat money in decentralized markets, where producers have private information about the quality of the goods they supply. Money is divisible, terms of trade are determined endogenously, and agents can finance their consumption with money or with real production. When the fraction of high quality producers in the economy is given, money promotes the production of high-quality goods, which improves the quality mix and welfare unambiguously. When this fraction is endogenous, however, we find that money can be valued even though it decreases welfare relative to the barter equilibrium. The origin of this ine .ciency is that money provides consumption insurance to low-quality producers, which can result in a higher fraction of low-quality producers in the monetary equilibrium. Finally, we find that most often agents acquire more information in the monetary equilibrium. Consequently, money is welfare-enhancing because it promotes useful production and exchange, but not because it saves information costs.

Suggested Citation

  • Aleksander Berentsen & Guillaume Rocheteau, "undated". "Money and Information," IEW - Working Papers 099, Institute for Empirical Research in Economics - University of Zurich.
  • Handle: RePEc:zur:iewwpx:099
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    Cited by:

    1. Manolis Galenianos & Rosalie Liccardo Pacula & Nicola Persico, 2012. "A Search-Theoretic Model of the Retail Market for Illicit Drugs," Review of Economic Studies, Oxford University Press, vol. 79(3), pages 1239-1269.
    2. Tao Peng, 2017. "Money And Product Quality Under Asymmetric Information," Economic Inquiry, Western Economic Association International, vol. 55(3), pages 1388-1399, July.
    3. Rocheteau, Guillaume, 2011. "Payments and liquidity under adverse selection," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 191-205.
    4. Benjamin Lester & Andrew Postlewaite & Randall Wright, 2011. "Information and Liquidity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(s2), pages 355-377, October.
    5. Williamson, Stephen & Wright, Randall, 2010. "New Monetarist Economics: Models," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 2, pages 25-96, Elsevier.
    6. Guillaume Rocheteau, 2008. "Money and competing assets under private information," Working Papers (Old Series) 0802, Federal Reserve Bank of Cleveland.
    7. Benjamin Lester & Andrew Postlewaite & Randall Wright, 2008. "Information, Liquidity and Asset Prices," PIER Working Paper Archive 08-039, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    8. Richard Dutu & Ed Nosal & Guillaume Rocheteau, 2005. "On the recognizability of money," Working Papers (Old Series) 0512, Federal Reserve Bank of Cleveland.
    9. Berentsen, Aleksander & McBride, Michael & Rocheteau, Guillaume, 2017. "Limelight on dark markets: Theory and experimental evidence on liquidity and information," Journal of Economic Dynamics and Control, Elsevier, vol. 75(C), pages 70-90.
    10. Bignon, Vincent & Dutu, Richard, 2017. "Coin Assaying And Commodity Money," Macroeconomic Dynamics, Cambridge University Press, vol. 21(6), pages 1305-1335, September.
    11. Ennis, Huberto M., 2008. "Search, money, and inflation under private information," Journal of Economic Theory, Elsevier, vol. 138(1), pages 101-131, January.
    12. Faig Miquel & Jerez Belén, 2006. "Inflation, Prices, and Information in Competitive Search," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(1), pages 1-34, September.
    13. Silveira, Rafael & Wright, Randall, 2010. "Search and the market for ideas," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1550-1573, July.
    14. Bandyopadhyay, Siddhartha, 2013. "Market thickness, prices and honesty: A quality demand trap," Mathematical Social Sciences, Elsevier, vol. 65(1), pages 52-59.
    15. Aleksander Berentsen & Guillaume Rocheteau, 2002. "Money in Bilateral Trade," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 138(IV), pages 489-506, December.
    16. Eduardo Giménez, 2007. "On the positive fundamental value of money with short-sale constraints," Annals of Finance, Springer, vol. 3(4), pages 455-469, October.
    17. Andolfatto, David & Berentsen, Aleksander & Waller, Christopher, 2014. "Optimal disclosure policy and undue diligence," Journal of Economic Theory, Elsevier, vol. 149(C), pages 128-152.
    18. Randall Wright, 2005. "Introduction to \\"Models of Monetary Economies II: The Next Generation\\"," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 29(Oct), pages 2-9.
    19. Bajaj, Ayushi, 2018. "Undefeated equilibria of the Shi–Trejos–Wright model under adverse selection," Journal of Economic Theory, Elsevier, vol. 176(C), pages 957-986.
    20. He, Ping & Huang, Lixin & Wright, Randall, 2008. "Money, banking, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1013-1024, September.
    21. Kang, Kee-Youn, 2017. "Counterfeiting, screening and government policy," Journal of Economic Theory, Elsevier, vol. 172(C), pages 26-54.
    22. Zhang, Cathy, 2014. "An information-based theory of international currency," Journal of International Economics, Elsevier, vol. 93(2), pages 286-301.
    23. Guillaume Rocheteau, 2009. "A monetary approach to asset liquidity," Working Papers (Old Series) 0901, Federal Reserve Bank of Cleveland.

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    More about this item

    Keywords

    Money; search; adverse selection; moral hazard;
    All these keywords.

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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